MH Real Estate Investment Blog

The rhetoric isn’t mine. You can thank Ben Bernanke for the clear vision he sees for the economy unless Congress acts to soften the blow of several year end tax increases.

What does this mean to you? Possibly quite a bit from a personal standpoint but for your tenants most likely not so much.

A statistical analysis of our rental base shows that almost 86% of our tenants will likely not be affected by the expiration of the ‘Bush Tax Cuts’ or the expansion of the Alternative Minimum Tax. This means that most of the renters out there are going to continue struggling along paying their rent without a real change in their financial position. Can this necesarily be extrapolated to other areas? NO, but I would wager that many rental-dense markets will have a similar demographic base.

Now, let’s say your rental properties are in areas that are likely to be affected by the expiration of these tax cuts. Odds are your tenants aren’t going to move out or quit paying their rent over a budget difference of a couple of hundred dollars each month. This may on the other hand limit your ability to raise the rent over the next couple of years, at least if you’re interested in retaining the tenant.

Long-term it is worth the short term pain of rent suppression to improve the foundation of the economy so that we can get back into job creation mode. The Fed complains that they will be limited in what they can do to combat the potential economic crisis, but the reality is that borrowing or printing more money will only create a bigger problem for you and your tenants down the line. Rents increase primarily due to demand. If inflation is out of control reducing purchasing power for the consumer, this will serve only to shrink households which reduces demand for housing and rents stay stable or decline. If we continue to borrow money, at some point taxes have to be raised dramatically to pay for the borrowed money cutting into the consumer’s budget again reducing the amount of money they have to spend on housing.

The best scenario for rental markets is through government policies which will improve job creation and business expansion.

Investors are ramping up the buying, an indication that prices are beginning to stabilize. Home sales were up 8.4% in February 2012 as compared to February 2011; however prices have continued to decline, nearly 4% over the same 12 month period.

Prices are low, interest rates are low, this should be an ideal time to buy real estate and lock in the likelihood of very favorable returns.

Unfortunately, high unemployment, uncertain government policies and tight bank lending are still conspiring against a market rebound.

We know that prices aren’t going to dramatically increase until demand for housing increases which requires the consumer segment of the population to jump into the game. Investors can get qualified more easily because of a greater access to capital and in this market environment cash is king. Until your average family has the ability to save up enough money for a reasonable down payment or banks loosen up their lending criteria it is going to be difficult to see a sustained bounce in real estate prices.

What does this mean to you? Be picky! Start looking and take your time to find a good piece of real estate that is likely to be the benefit of market appreciation in the future. There are lots of properties on the market at valuations that offer plenty of upside. Usually it comes down to a price play, but now is the time to be even more focused on the property location and the surrounding demographics as this is going to play a large role in how quickly you can start turning a profit.

Invest in real estate long enough and you’re bound to make a bad deal somewhere along the way; however the vast numbers of new investors in distressed real estate has shown me there is a need to set a few basic ground rules for successful investing.

1. Never ignore local market conditions. A great property in the wrong part of town can be a big loser. Technology tools that pull together medians and averages of the market are very helpful, but that data probably isn’t going to be an accurate indicator of what you can charge if your property is right up the street from the local liquor store or other undesirable element. The ‘great deal’ you think you’re getting might not end up being that great once you find out the rents you can charge are substantially below average.

2. Inadequate Due Diligence. Take the time to find a property inspector you trust. It is well worth the couple hundred extra you may end up paying him to get an accurate picture of what it is going to cost you to bring the place to an acceptable condition. Finding out after the fact that the property needs an extra 5, 10 or 20k in repairs is not pleasant and can jeopardize your ability to turn a profit on the deal in the short-term.

3. Screwing Up The Math. Real estate is essentially a numbers game. Value depends on the ability to generate net operating income. And I’m talking about actual income, don’t use estimates and potential as much as possible when trying to derive a valuation. Your profit is entirely dependent on net income so if you’ve overestimated revenue or underestimated expenses, your profit will suffer. If you do have to ‘guess’ make sure that you build that risk into the pricing, in other words the greater the chance you have to take to turn a profit, the greater those potential profits should be.

Lastly, don’t be afraid to walk away from a deal. Most standardized California Assocation of Realtors forms have protections for both the buyer and seller in case new information comes to light, but in the event it comes down to buying a dog of a property or walking away from a $2,000 deposit. You are better off, moving on taking a small loss instead of dealing with an ongoing frustation and money pit.

I read an interesting article earlier today espousing the point of view that mortgage rates are too low and the Fed’s decision to keep rates low until at least the middle of 2014 is stunting the housing market’s recovery because it eliminates one of the incentives to buy – locking in a low rate.

While I think that point of view has merit, I think low mortgage rates are actually a sign that the lending environment is still fundamentally broken. The reason it is broken is because of the connotation associated with subprime. Prior to the housing meltdown, there were way too many ‘prime’ loans being written. It was as if you were back in grade school and the teacher gave out A’s to 80% of the students.

One of the fundamental rules of economics is risk vs. reward. If a business is going to invest capital it should price its products in such a way that the risk for entering the business transaction is weighted by potential financial rewards. This rule was trampled to death which is why the decline in the market was so drastic and brutally severe.

So back in the go-go days of the mortgage industry, we had too many people getting ‘prime’ loans at prime loan rates then to compound the matter lots of people signed up for supposedly subprime loans which were priced so close to the prime rates that the difference was statistically meaningless in the event of a default. What happens when risk is not properly accounted for? Massive losses.

Now consider the difference if the weighted APR across the $5 trillion or so residential mortgages was 1% higher. The additional income would have eliminated the need for a taxpayer bailout and most likely kept several investment banks(hello Bear Stearns) from going under.

Sometimes common sense trumps complex mathematical formulas which depend on lots of guesses regarding future performance.

How does all of this apply today? Subprime is a dirty word, but the elimination of this pool of candidates is making the recovery more difficult. Banks need to eliminate their pre-conceived notion of what subprime rates should be in relation to prime rates, price for the additional risk and get back in the lending game.

Housing hasn’t been more affordable in a number of years because of the sheer drop in the value of the home. For example, a home selling for $400,000 6 years ago can be had in many neighborhoods for $250,000 or less. At the same interest rate(5.5%) but simply accounting for the principal reduction, the payments drop roughly $840 a month. If you drop the rate to 4% the payments only drop another ~$240 which I would argue is much less impressive and less likely to generate action than the original $840 in savings but think about how much money the bank would be able to add to its capital reserves if it kept rates at 5.5% and put the 1.5% premium away.

The real estate market has taken its valuation plunge, it’s now time to rebuild our neighborhoods one properly priced loan at a time.

I took some time off to spend with the family. We have added a beautiful 6-month old baby boy to the family and as much as I enjoy writing and discussing real estate, family is priority number one. Anyway, mother and son are doing great so it’s back to business as usual.

For the countless time, headlines across America screamed,”the housing market is starting to heal” because existing home sales rose 4.3% in January. Don’t get your hopes up quite yet as this increase was somewhat of an illusion.

What many people failed to notice is that December sales were downwardly revised from a 4.61 million to a 4.38 million pace. There are 2 approaches you can take to the January numbers.

First, it is highly likely that January’s results will be downwardly revised eliminating the increase. If you go back and look at the numbers, 8 of the last 10 months have had statistically relevant downward revisions from the general consensus.

Secondly, in case the numbers aren’t downwardly revised, the improvement in January could have been due to carryover from the deals that didn’t book in December as originally anticipated which negates the notion that somehow the economy is improving.

Let’s also be cautious before trumpeting the improvement in employment numbers as a reason behind a boost in the housing market. I was in lending for a while leading up to the subprime debacle and we were aggressive lenders; however length of employment was still an important criteria. It is good that people are beginning to find jobs according to the government (even if we can debate the reality of that notion) but to think that is going to make a difference this year is foolish with as tight as lending guidelines are. My guess is that labor improvement this year will point to a stronger recovery in the housing market next year as people feel more comfortable that they are going to keep their job and have had some time to put away money for a down payment.

I’m not going to take the position that everyone needs a property manager for their rental units, but I will say that rental properties need more time and attention than most owners think they are going to have to put into them.

Dealing with tenant concerns and complaints(especially in multi-unit complexes) can take up tremendous amounts of time not even considering the energy that must be put into coordinating property repairs.

One area that I see get skipped over is the ‘property inspection’ especially if the tenant is paying the rent on time. The general thought is the tenant is paying the rent, they aren’t calling me to for repairs, everything must be ok….wrong!!!

This is what can happen with that line of reasoning –

We do semi-annual inspections in our high-rent districts and quarterly inspections in our more economically challenged markets to make sure our clients are being adequately protected.

So the next time you’re thinking of skipping that property inspection, take a look at the picture above and scoot on over to the property.

This law is applicable for all areas of California; however it is even more likely to come into play in the counties of Riverside and San Bernardino which traditionally rank higher in number of reported domestic abuse cases.

What the law(Code of Civil Procedure 1161.3) states is that a landlord shall not terminate a tenancy or fail to renew a tenancy where a tenant has been a subject of domestic abuse.

In the past the easiest way to deal with the disturbance was simply to issue a notice to vacate; however that is no longer possible. There are several ways to deal with the problem.

The first way is to make sure you are adequately screening your potential tenants. A background/criminal check in conjunction with a credit check can reveal potential red flags and help you avoid a potential future pitfall altogether.

Hindsight is always 20/20, so if you already find yourself in this situation, it is important to document every violation no matter how small so you can provide legitimate reasons not related to the domestic abuse issue as to why you did not renew the lease or as to why you issued a notice to vacate.

This written documentation is extremely important because you never know if your tenant is going to call an attorney and try to make a quick buck off you. Our office retains a file on each tenant with copies of the notices of violation that were sent out as well as a log of all phone calls made in case we have to produce records for a court case.

Dealing with tenant issues like these can be challenging but worse very expensive if not handled properly. It is always in your best interest to consult an attorney or other professional before tackling problem tenants.

The home warranty is almost as ubiquitous as the home mortgage, a typical inclusion in any real estate transaction. It is my professional opinion that these programs are a good deal to have on any older rental property as the combination of age and tenant abuse make it likely that you will get your money’s worth out of the program.

American Home Shield is the major provider of these programs and they recently settled a class-action lawsuit alleging they gave illegal kickbacks to agents and/or brokers to promote their warranty program.

So if you bought a warranty program from AHS in the last couple of years you may be entitled to a piece of the class action pie. You can find additional details here http://faughtclassaction.com/

We typically counsel property owners to collect the first month’s rent along with the deposit at the time the lease agreement is signed to avoid this situation, but at times an owner will simply collect the deposit without getting the first month’s rent.

What happens if the tenant changes their mind before taking possession of the property?

You can likely keep some of the deposit, but not necessarily all of it.
Had the applicant and you signed the lease agreement? If not, you probably can’t keep any of it if she took you to court unless the deposit was actually a holding deposit for which you had a written agreement or could otherwise prove the terms of the deal.

If it was a holding deposit without a signed lease, is there a signed agreement that specifies what happens to the funds in the event of default by the applicant?

The best situation of course is to have a signed lease agreement in which case you may be able to keep the entire security deposit but most likely you would be entitled to a pro-rated portion of the deposit based on lost rents.

Many of you have had questions regarding this because it has come up frequently in economically depressed neighborhoods.

If you don’t serve him the suit while you know where to find him, you may never be able to sue him. In order to sustain a law suit, it is necessary to serve the defendant in the manner or manners required by the law of the particular state. In some jurisdictions, this means that the defendant must be physically handed a copy of the complaint and summons. Other jurisdictions allow service by mail, usually Certified or Registered Mail being required, in which case the defendant will often avoid accepting the mail. However, in this event, as well as for obvious attempts to avoid physical service, evidence showing the facts will often cause a judge to ignore the failure of service.

You should have the service done by an independent process server. First, this avoids a chance of an unfriendly confrontation. Second, it eliminates the judge having to decide which party is telling the truth when the defendant claims he was not properly served and the plaintiff claims he was because, absent serious evidence to the contrary, he will almost certainly believe the process server. In many jurisdictions the process server can be either a private for-hire server or an official officer of the court such as a deputy sheriff.

Once you obtain a judgment against the defendant, you can collect from him in any state where you can find him during the term for which the judgment remains valid. Although laws vary among states, judgments are typically good for 5 or more years and can usually be renewed for at least one additional equivalent period. His only defense would be that the court giving the judgment did not have jurisdiction over the matter, a defense not likely to be very useful in the case of an eviction or related matter.

Unless you have experience in appearing in eviction proceedings, you might consider hiring an attorney to both complete the eviction and file the suit, assuming being represented by an attorney is allowed in Small Claims court in your jurisdiction. In spite of the cost of an attorney, using one can actually be cost effective. A mistake in following the legal procedures can result in having to start over after weeks of waiting for the day in court. For anyone except the most experienced landlord, it is even more important to be represented by an attorney if the defendant uses an attorney.

Most jurisdictions will have experienced competent attorneys who do nothing except handle evictions and related matters. They will also be familiar with particular idiosyncrasies of individual judges. Rather than see who has the largest yellow page ad, it is best to get recommendations from other landlords or management companies because the best attorneys have plenty of business without advertising.

Finally, if he disappears after being evicted, you probably will have a good chance of finding him in the future, particularly after he has established permanent residency somewhere. In addition to the various social networking sites where people tend to provide a lot of personal information that might help track him down there are innumerable Web sites that offer services related to finding people for reasonable fees.